The US dollar has been one of the most profitable investments during 2015, climbing against most of its major rivals. This led to a strong uptrend in the dollar index as well, which managed to climb above the 100 mark twice – in March and in December 2015. The question is what could we expect from now on? Are we going to see a third ascent towards this psychological level or a “double top” technical pattern is currently in progress? Let’s see if the Elliott Wave Principle could help us find the answer.
The daily chart shows the whole development since May 2011, when the dollar index formed a bottom at 72.69. It has been rising ever since and the following bull trend looks like an unfinished five-wave impulse. Wave (1) is a leading diagonal, wave (2) is a double zig-zag, whose wave “y” gave the start of the powerful third wave – (3) – which has been a real blessing for the bulls. However, it appears the dollar index last lost direction in the last year, unable to leave the range between 92.60 and 100.50. In our opinion, that is because the impulsive pattern has entered one of its corrective phases – wave (4).
The rule of alternation suggests that the two corrective waves within an impulse tend to be of different type. For example, if the second wave is sharp, the fourth would be moving sideways and vice versa.
If we apply this guideline to the chart of the dollar index, we could expect a sideways retracement in wave (4), because wave (2) is a sharp double zig-zag. There are two types of sideways corrections – flats and triangles. The triangle option is given on the above-shown chart. It seems to be more probable, since another guideline says that impulses usually develop between the parallel lines of a trend channel. As visible, the lower line of the channel is still far away, which gives wave (4) plenty of room to consolidate, before wave (5) up begins.
However, there is another possible scenario, which could not be neglected. It suggests wave (5) is already in progress.
If we abandon the trend channel guideline, then wave (4) has already ended near 92.60 on August 24th, 2015. The following recovery does not look impulsive, which leaves us with the possibility of an ending diagonal in wave (5). If this is the correct count, the 100 mark could be taken out much sooner. However, the bulls would be getting more and more exhausted with each new pip to the north they conquer.
In conclusion, the dollar index seems to still have room to grow, before the bulls finally run out of power. The two counts, discussed in this material are equally probable, so we need to watch close and be prepared to act accordingly.
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